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by Thomas A. Stewart
Executive Summary
• Intellectual capital is knowledge that transforms raw materials and makes them more valuable.
• Conventional accounting fails to measure the value of intellectual capital, but markets clearly reward it.
• Intellectual capital includes the talent of staff, the value of proprietary knowledge and processes, and
the value of relationships with customers and suppliers.
Introduction
Intellectual capital is just that: a capital asset consisting of intellectual material. To be considered intellectual
capital, knowledge must be an asset able to be used to create wealth. Thus, intellectual capital includes the
talents and skills of individuals and groups; technological and social networks and the software and culture
that connect them; and intellectual property such as patents, copyrights, methods, procedures, archives,
etc. It excludes knowledge or information not involved in production or wealth creation. Just as raw materials
such as iron ore should not be confused with an asset such as a steel mill, so knowledge materials such as
data or miscellaneous facts ought not to be confused with knowledge assets.
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Indeed, it was the unusual behavior of the equities of knowledge-intensive companies that first drew the
attention of analysts to intellectual capital. The term seems to have been employed first in 1958, when
two financial analysts, describing the stockmarket valuations of several small, science-based companies,
concluded that “The intellectual capital of such companies is perhaps their single most important element,”
and noted that their high stock valuations might be termed an “intellectual premium.” (Morris Kronfeld and
Arthur Rock, “Some Considerations of the Infinite,” The Analyst’s Journal, November 1958, p. 6.) The idea
lay dormant for a quarter of a century. In the 1980s, Walter Wriston, the former chairman of Citicorp, noted
that his bank and other corporations possessed valuable intellectual capital that accountants (and bank
regulators) did not measure.
Making It Happen
• Treat knowledge as an asset only if it is capable of yielding an economic return.
• Build human capital by developing the skills, competencies, and abilities of individuals and groups who
deliver value to customers.
• Convert human capital into structural capital by organizing the exchange and sharing of knowledge.
• Optimize customer capital—the value of relationships with suppliers, allies, and customers—by building
brand equity and customer loyalty.
• Use knowledge assets to reduce the expense and burden of carrying physical assets, or to maximize
return on those assets.
• Look for competitive advantage from innovation, customization, and service rather than from
economies of scale.
More Info
Books:
• Davenport, Thomas H., and Laurence Prusak. Working Knowledge: How Organizations Manage What
They Know. Cambridge, MA: Harvard Business School Press, 2000.
• Edvinsson, Leif, and Michael S. Malone. Intellectual Capital. New York: Harper Business, 1997.
• Mayo, Andrew. The Human Value of the Enterprise: Valuing People as Assets—Monitoring,
Measuring, Managing. Naperville, IL: Nicholas Brealey, 2001.
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• Stewart, Thomas A. Intellectual Capital: The New Wealth of Organizations. New York: Doubleday,
1997.
• Stewart, Thomas A. The Wealth of Knowledge: Intellectual Capital and the Twenty-First Century
Organization. New York: Doubleday, 2003.
• Sullivan, Patrick H. Value Driven Intellectual Capital: How to Convert Intangible Corporate Assets into
Market Value. New York: Wiley, 2000.
• Teece, David J. Managing Intellectual Capital. New York: Oxford University Press, 2002.
Website:
• Intellectual Capital Startpage, a truly global website with links to dozens of IC resources:
www.intellectualcapital.nl
See Also
Best Practice
• Managing Intellectual Capital
• Protecting Your Intellectual Property—Nonregistered Rights
• Protecting Your Intellectual Property—Registered Rights
• The Value and Management of Intellectual Property, Intangible Assets, and Goodwill
Checklists
• Assessing Economies of Scale in Business
• Intellectual Property—Copyright
• Intellectual Property—Patents—An International Overview
• Intellectual Property—Registered Designs and Trademarks
Thinkers
• C. K. Prahalad
Finance Library
• Intellectual Capital: The New Wealth of Organizations
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